This research report ordered by the California Senate analyzes problems and possible solutions to postsecondary education finance in that state. A first section explores the background to the issues and concludes that higher education should be a top priority of the state government now and in the future. A second section examines the problem of how the state can respond to its projected needs in education by looking at: how higher education has been funded in the state in the past; how California compares to other states; the benefits of seeing higher education as an investment; and alternative funding sources. The third section proposes a solution to economic constraints through institutional reform, lessons from other states that have revitalized higher education, and suggestions for what can be done in California. The report recommends recommitment to the state's investment in The Master Plan, reduction in state budget caseload growth in those programs that threaten higher education future funding, cuts in campus costs, a refocusing on regional collaboration, sharpened goals and mission, confrontation of workload and cost concerns through a redesign of faculty reward systems, enhanced student preparation and performance, and linkage of policy goals to funding through monitoring performance outcomes. (Contains 63 references.) (JB)